We are examining a new project. We expect to

sell $8,750$ units per year at $$189$ net cash flow apiece $($including CCA$)$ for the next $16$ years. In other words, the annual operating cash flow is projected to

be $$189\backslash$times $8,750=$ $$1,653,750.$ The relevant discount rate is $14\%,$ and the initial

investment required is $$5,500,000.$ In the previous problem, suppose the

scale of the project can be doubled in one year in the sense that twice as many

units can be produced and sold. Naturally, expansion would be desirable only

if the project is a success. This implies that if the project is a success, projected

sales after expansion will be $17,600.$ Again, assuming that success and failure are

equally likely, what is the NPV of the project? Note that abandonment is still an

option if the project is a failure. What is the value of the option to expand